For years, Mexico has been the primary target for most nearshoring initiatives. Its proximity to the U.S., skilled workforce, and favorable trade agreements makes a compelling option. Beneath the headlines of the movement lies a complex landscape with both advantages and disadvantages. This report dives into the key considerations for companies contemplating a nearshoring move to Mexico. We’ll explore the challenges of resource reliance, infrastructure limitations, and navigating labor costs. Additionally, we’ll examine the logistical considerations, including transportation hurdles and security concerns. By understanding these intricacies, companies can make informed decisions and develop effective strategies to maximize the benefits of nearshoring to Mexico.

Resource Reliance and Geopolitical Exposure:

Mexico’s strategic location and favorable trade agreements are overshadowed by its dependence on imported raw materials, often heavily concentrated on China. This exposes companies to a multitude of risks beyond Mexico’s borders.

When a company relies on a single source, especially from a country with a volatile currency, even minor fluctuations can significantly impact production costs. Sudden devaluations in the supplier’s currency can lead to higher import costs, squeezing profit margins and potentially making Mexican manufactured goods less competitive on the global market.

Geopolitical tensions, natural disasters, or infrastructure issues in the sourced country can disrupt the flow of raw materials. Companies in Mexico then face production delays, shortages, and potential scrambling to find alternative suppliers, which can be a time-consuming and expensive process.

Real Estate Squeeze and Infrastructure Bottlenecks:

The proximity to the US market and lower labor costs make Mexico an attractive nearshoring destination. However, identifying suitable locations with the necessary infrastructure presents a significant challenge. The current nearshoring boom has intensified competition for industrial space, particularly in prime locations near the US border. Available land is being snapped up quickly, driving up lease rates and making it difficult to secure the space needed for large-scale manufacturing operations.

Even if land is secured, Mexico’s aging power grid and limited transmission capacity can further restrict expansion plans. Many industrial areas struggle with insufficient or unreliable electricity supplies, hindering the ability to power modern manufacturing equipment and maintain efficient production. This can force companies to consider investing in expensive backup generators or limit their operations to specific times of day when the grid has more capacity.

By carefully evaluating infrastructure capabilities alongside other factors like land availability and labor costs, companies can make informed decisions about nearshoring locations in Mexico. A successful nearshoring strategy requires not just physical space but also a robust and reliable infrastructure ecosystem to support efficient and sustainable manufacturing operations.

Navigating the Manufacturing Landscape

Beyond Labor Costs:  While lower labor rates are often a major draw for companies considering nearshoring to Mexico, a more nuanced understanding of labor costs is crucial. Mexico offers significant savings compared to the US, but there are additional factors beyond the base wage that need to be factored into the equation.

Mexico has seen a consistent increase in minimum wages in recent years. While this is positive for workers’ well-being, it can erode some of the initial cost advantage over time. Companies need to factor in these potential future increases when making long-term financial projections.

Mexico has strengthened its focus on worker rights in recent years. This can lead to benefits like paid vacations, healthcare, and profit-sharing, which add to overall labor costs. Additionally, a rise in union activity can make an impact, potentially leading to limitations on overtime or increased negotiation power for workers regarding wages and benefits.

Considering these additional factors paints a clearer picture of the true cost of labor in Mexico. While it remains lower than in the US, it’s not simply a matter of base wages. Building a successful and sustainable workforce in Mexico requires a strategic approach that considers worker well-being, legal compliance, and long-term cost implications.

Transportation Logistics:

Nearshoring to Mexico offers the advantage of shorter shipping times to the US market compared to transporting goods from Asia. This translates to reduced inventory holding costs, faster response times to customer demands, and potentially improved product freshness for certain goods. However, capitalizing on these benefits requires careful navigation of Mexico’s transportation landscape, which is characterized by both opportunities and challenges.

Many roads in Mexico, particularly outside major cities and industrial hubs, are narrow, poorly maintained, and susceptible to congestion. This can lead to longer transit times and higher transportation costs. Additionally, limited investment in rail infrastructure restricts its use as a more efficient and cost-effective alternative for long-distance freight movement.

The transfer of goods between different modes of transportation (e.g., truck, rail, ship) is crucial for efficient supply chains. However, Mexico’s intermodal connectivity is underdeveloped, often requiring multiple handoffs and additional paperwork, leading to delays and increased administrative burdens.

Certain regions in Mexico, particularly those bordering the US, have a higher prevalence of cargo theft. This can lead to significant financial losses for companies and disrupt supply chains. Companies need to implement robust security measures, including GPS tracking, secure warehousing, and potentially armed escorts for high-value cargo.

Acknowledging and addressing these transportation challenges allows companies to leverage the benefits of shorter shipping distances offered by nearshoring to Mexico. Investing in strategic partnerships, route optimization, and robust security measures can ensure efficient and reliable transportation, ultimately contributing to a successful nearshoring experience.

Conclusion:

Mexico presents a compelling nearshoring option due to its proximity to the US, skilled workforce, and favorable trade agreements, but complexities require consideration. Dependence on imported raw materials exposes companies to external risks. Infrastructure limitations, including competition for industrial space and an aging power grid, demand careful evaluation when choosing a location. Labor costs, while lower than the US, involve additional factors like rising minimum wages and worker rights that need to be factored into long-term planning. Transportation challenges exist, with underdeveloped infrastructure and security concerns requiring strategic partnerships and robust measures. Despite these intricacies, by acknowledging and addressing them, companies can leverage the benefits of nearshoring to Mexico, such as shorter shipping distances and a more responsive supply chain. Ultimately, a successful nearshoring strategy to Mexico requires a nuanced understanding of both the advantages and the challenges it presents.

Ready to Explore Your Options?

The benefits of nearshoring are undeniable, but navigating the process can be complex. Forsyth Advisors has a proven track record of helping companies achieve successful transitions. Contact jpratt@forsythadvisors.com to learn more and ensure your business thrives in the new economic landscape.